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When a company has reached the end of its useful life and is no longer required, it will need to be dissolved. If a company has no assets, then the directors may be considering a voluntary application for striking off. If the company has been profitable, it may still have assets and cash reserves.
Can you close a company with assets and retained earnings?
Yes, but the process will be determined by the company’s financial position. Tax planning should also be taken into consideration.
Generally the phrase ‘closing a company’ means a company’s dissolution. Dissolution is when a company ceases to exist legally and is removed from the register with Companies House.
There are two legal processes available to dissolve a solvent company:
How does a Striking off application by a company work?
This route is best suited to companies which have net assets up to £25,000.
If the assets to be distributed to shareholders are less than £25,000, shareholders can automatically get capital gains tax treatment on a strike off (no prior application to HM Revenue & Customs required), but if the assets are above £25,000, the tax treatment will be as dividends so income tax.
Before applying to strike off a limited company, it must be closed down legally.
A notice is also advertised in the London Gazette, known as the first gazette notice.
Companies House will check with HMRC to establish if there are any outstanding tax liabilities.
A company is not eligible for striking off if, in the previous three months, it has:
- changed its name
- traded or otherwise carried on business
- made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business, or
- engaged in any other activity, except one which is:
(i) necessary or expedient for the purpose of making an application under that section, or deciding whether to do so,
(ii) necessary or expedient for the purpose of concluding the affairs of the company,
(iii) necessary or expedient for the purpose of complying with any statutory requirement, or
(iv) Specified by the Secretary of State by order for the purposes of this sub-paragraph.
A company is also not eligible if it is subject, or proposed subject, to any insolvency proceedings or compromise arrangement.
If a company is not eligible, it will have to be voluntarily liquidated.
Additional considerations:
- Bona Vacantia: If the company has any remaining assets when it is dissolved, these automatically vest with the Crown.
- Keeping records: Business documents must be kept for 7 years after the company is dissolved.
- Director liability: If a director fails to comply with the rules regarding a company’s application for striking off, he can be held personally liable to a fine and possible prosecution.
- Restoration: A company can be restored to the register within six years of dissolution.
What is compulsory striking off?
If a company fails to file its statutory returns and/or accounts with Companies House by the due date, Companies House may have reasonable cause to believe that a company is not carrying on business or in operation.
In this situation Companies House is able to apply for the company to be compulsorily struck-off in accordance with section 1000 of the Companies Act 2006.
A notice is advertised in the Gazette stating that, unless cause is shown to the contrary, the company will be struck off the register and dissolved at the expiration of two months from the date of the notice.
Any interested party can make an objection to a strike off application. Any objections have to be made in writing, sent to the Registrar of Companies alongside any supporting evidence.
If an objection is upheld by the Registrar before the two months has expired then the strike off will be suspended.
What does it mean when a company’s status shows ‘active – proposal to strike off’?
This is when a company is still live or active but there is a proposal for the company’s to be struck off. This could be either a voluntary or compulsory application. If the application is not objected to, the company’s status will change to dissolved.
How does a Members’ Voluntary Liquidation work?
This route is best suited to companies which have net assets in excess of £25,000 or are not eligible for a striking-off application and are solvent.
A Members’ Voluntary Liquidation or MVL is a legal process used to formally wind-up a solvent company’s affairs. Only a licensed Insolvency Practitioner may act as Liquidator.
The process allows all outstanding matters to be closed out, net funds and assets to be distributed to shareholders and the company’s dissolution.
A company is solvent if its assets are sufficient to settle all liabilities and costs, including interest, in full within 12 months of the company being placed into liquidation.
A majority of the company’s directors will make a statutory Declaration of Solvency confirming the company’s financial position.
Once the declaration is made, shareholders are then able to consider passing resolutions to place the company into liquidation and appoint a Liquidator.
Upon the appointment of a Liquidator, the director’s powers cease and the liquidator becomes responsible for winding-up the company’s affairs. Directors have an ongoing duty to cooperate with the Liquidator and can be instructed to assist with the winding-up.
Once appointed, the Liquidator’s functions are to realise the company’s assets for best value, agree and settle creditor claims, discharge the costs of the liquidation and distribute surplus funds and/or assets to shareholders.
A Liquidator must obtain clearance from HM Revenue & Customs before the liquidation can be concluded. All outstanding pre liquidation tax returns will need to be submitted to HM Revenue & Customs, all liabilities and interest settled and clearance obtained.
Once all liquidation matters have been completed, the Liquidator issues shareholders with a draft final account. Provided shareholders have no further queries, a final account is issued which concludes the liquidation. Once filed, Companies House commence the dissolution process which takes around three months.
What are the benefits of a Members’ Voluntary Liquidation?
- Tax efficient distributions over £25,000 to shareholders (capital gains tax treatment)
- Cost effective procedure (MVL cost vs personal tax savings to shareholders)
- Shareholders can get quick access to funds
- Distributions can be in cash, in specie or both
- Timing (no need to wait for three months post cessation of trade)
- A legal process to bring the company’s affairs to an orderly conclusion
- Saves accounting fees as requirement to file statutory accounts ends on a company entering liquidation
- An independent licensed Insolvency Practitioner is appointed to complete the process for you
- Companies House commence the dissolution process once the liquidation ends
- Restoration period of six years is the same as striking off application
What happens to retained earnings when you close a business?
If a company has any retained earnings when it is ‘closed’ or dissolved, these automatically vest with the Crown in accordance with Bona Vacantia. It is therefore essential that a company’s assets are dealt with before a company is dissolved.
If a company is being dissolved following a striking off application by the company, then the assets should be dealt with by the directors before dissolution. It the net asset value is in excess of £25,000 then a Members’ Voluntary Liquidation may be more appropriate.
In a Members’ Voluntary Liquidation, a Liquidator distributes surplus assets to shareholders. A Liquidator’s distribution is classed as capital which makes it an attractive option where a company’s net asset value is in excess of £25,000.
What is the most tax efficient way of closing a company?
The route to dissolution will depend on a number of considerations, including the company’s and shareholder’s tax position. Obtaining professional advice is therefore fundamental in ensuring the most tax efficient route is chosen.
In a striking off application by a company, capital gains tax treatment is limited to £25,000. If a company is distributing assets and cash to shareholders in excess of £25,000, then it is likely that any amounts over £25,000 will be subject to income tax.
In a Members’ Voluntary Liquidation, a Liquidator’s distributions to shareholders are classed as capital and therefore subject to capital gains tax. This route can therefore prove to be highly tax efficient where a company has net assets in excess of £25,000.
Capital gains tax normally leads to lower tax bills than dividends, but not always, so check with your personal tax accountant first. If you do not have a personal tax accountant, we can help you.
Can you get Entrepreneurs’ relief on liquidation?
A Members’ Voluntary Liquidation is an attractive option to wind-up a company’s affairs because a Liquidator’s distribution to shareholders is classed as capital, not income. Subject to the shareholder’s personal tax position, there are potential significant tax savings in an MVL.
In most situations, capital gains tax is comparatively lower than income tax and further savings are available if shareholders qualify for Entrepreneurs’ relief.
Entrepreneurs’ relief reduces the rate of capital gains tax on disposals of certain business assets from 20% to 10%.
Further information can be found at the following GOV.UK link: https://www.gov.uk/entrepreneurs-relief
Capital gains tax normally leads to lower tax bills than dividends, but not always, so check with your personal tax accountant first. If you do not have a personal tax accountant, we can help you.
This information is only provided for general information purposes. For specific advice, it is recommended that professional advice is sought.
Summary
With appropriate professional advice, closing down a company can be a simple and tax efficient process.
If a company has net assets in excess of £25,000, then a Members’ Voluntary Liquidation could be a tax efficient process for shareholders to receive a company’s surplus assets.
Only an authorised and licenced Insolvency Practitioner may act as Liquidator of a company.
Many IPs offer a free initial consultation and Approved Recovery are no different.
Approved Recovery specialises in providing Members’ Voluntary Liquidations to small companies nationwide.
We service trading, contractor, consultant and dormant companies. We also have experience in dealing with special purpose vehicles and corporate group simplification.
We offer a simple Members’ Voluntary Liquidation service called Solvent Solutions.
Contact us for a free no obligation consultation.
